Sub-accounts

One of the key advantages of Manulife One is the ability to consolidate your debt and enjoy one low rate of interest. However, there may be times when you’d like to track some of your debt separately or lock-in a portion of your debt at a fixed rate.

Manulife One gives you the flexibility to divide your debts between up to 15 variable-rate sub-accounts and five fixed-rate sub-accounts.

Variable-rate sub-accounts

A variable-rate sub-account allows you to track a portion of your debt separately at the same low interest rate as your main account.  If you make a large purchase, for instance, you may want to see that it’s being paid down. Or you may incur debt for investment purposes and want to keep track of that debt to possibly deduct its interest from your income tax.¹

Variable-rate sub-accounts can be increased or paid down at any time without penalty. In fact, you can pay any variable-rate sub-account completely off at anytime, if you choose. When the debt is gone, the sub-account will be closed automatically.

It’s important to note, however, that once a sub-account is set up, it will never be eliminated until you’ve paid it down.
In other words, Manulife Bank will not use any funds in the Main account to reduce your sub-account, unless instructed by you to do so. You must specifically request to pay it down – either by “principal and interest” payments or lump sums.

This means that you could find yourself in the situation of having a positive balance in the Main account (earning you the Manulife One Credit Rate) while you continue to hold, and be charged interest on, debt in a sub-account. In other words, the positive balance will not offset the negative balance in the sub-account.

Fixed-rate sub-account

You may wish to lock in some of your debt at a fixed rate to protect it against rising variable rates or to add some stability to your cash-flow. Manulife One allows you to lock in up to 100% of your current borrowings at a fixed rate
and for a fixed term of one to five years.

These fixed rates are not linked to the Manulife One base rate but are determined independently and subject to change from time to time.

Since a fixed-rate sub-account is more like a traditional mortgage held within the account, pre-determined principal and interest payments are made to it from the Main account. And account holders can pre-pay an additional 10% of the original amount of the fixed-rate sub-account per contract year. You may incur a penalty if you choose to close down
the fixed-rate sub-account before the end of its term.

This means that you could find yourself in the situation of having a positive balance in the Main account (earning you the Manulife One Credit Rate) while you continue to hold, and be charged interest on, debt in a sub-account. In other words, the positive balance will not offset the negative balance in the sub-account.

Concerned that rates are going up? Remember to look at the BIG picture.

When we hear predictions that interest rates are going up, we may be tempted to lock-in our debt in a traditional, fixed-rate mortgage. But we might miss the big picture. Learn more

For example

The Cornells currently have an outstanding balance of $180,000 in their Manulife One account. Part of this balance -- $15,000 – came from recently purchasing a new car. They also used $50,000 to purchase an investment.

The Cornells would like to be able to track the interest and the payments they make on these purchases so they set up two variable-rate sub-accounts:

• Variable-rate sub-account #1 – Car $15,000
• Variable-rate sub-account #2 – Investment $50,000

The remaining balance in the Main account is $115,000. Not long after this, they decided to take half of their remaining balance — $57,500 — and lock it into a two-year fixed-rate sub-account to protect against future interest rate increases.

¹ Borrowing to invest may not be appropriate for everyone. You should be fully aware of the risks and benefits associated with leveraged borrowing since losses as well as gains may be magnified. Preferred candidates are those willing to invest for the long term and not averse to increased risk. You should be aware that this strategy may have a higher risk as your home is offered as security for the loan and you will be required to make payments regardless of the performance of your investment. The value of your investment will vary and is not guaranteed, however you must meet your loan and income tax obligations. The dealer and advisor are responsible for determining the appropriateness of investments for their clients and informing them of the risks associated with borrowing to invest.  Tax-deductibility of loan interest depends on a number of factors, with the Income Tax Act providing the framework for determining tax-deductibility.  Readers should consult their own tax and legal advisors with respect to their particular circumstance.